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    Kaun Banega ‘Service Receiver’

    The title of the article has taken its genesis from the newly introduced Place of Provision of Service Rules, 2012 (for brevity ‘POP Rules’). As every person reading this article know that there is a paradigm shift in the taxation of the services with effective from 01.07.2012, popularly known as ‘Negative List’ regime. In addition to such shift in the taxation base, there were also new set of rules called POP Rules for determining the taxability of a transaction, generally a cross-border one. 

    Before understanding the title of the article in light of POP Rules, let us have a look at the new charging section that is Section 66B which states that there shall be levied service tax on the services provided or agreed to be provided in the taxable territory. Hence, the question to be answered is simple and one liner ‘Whether the services provided or agreed to be provided are in the taxable territory?’ If yes, then the charging section holds good and if not there is no levy. 

    However, the answer for the above question is not a one liner. One has to look carefully into the POP Rules. The main aim of the POP Rules are to guide the place of consumption of the service and let us have peek into the POP Rules to understand the significance of the title of this article. 

    As per the said Rules, the place of consumption of a service is determined in light of Rule 3 to 12, which are summarized as under:

     

    Rule

    Particulars

    Place of Consumption

     

    3

    General Rule

    Location of Service Receiver

     

    4

    Performance Based

    Location of Service Performed

     

    5

    Immovable Property

    Location of Immovable Property

     

    Based

     

     

     

    6

    Event Based

    Location of Event

     

    7

    Greater Proportion Rule

    Location where greatest proportion of service

     

    8

    Proxy Rule

    If Service Provider and Service Receiver are located in taxable territory

     

    - taxable territory

     

     

     

     


     

     

       

     

     

     

     

    9

    Specified Services

    Location of Service Provider

     

    10

    GTA Services

    Destination of the Goods

     

    11

    Passenger Transportation

    Place where passenger embarks on a continuous journey

     

     

    Services

     

     

    12

    Services provided on

    First Scheduled point of departure

     

    Board

     

     

     

     

    From the above, it can be carefully concluded that except for the specific services which are falling from Rule 4 to 12, the place of consumption of services is location of the service receiver. That is to say, for all services which are not falling into the ambit of Rule 4 to 12, the location of the service receiver is driving factor to determine the tax liability. However, for finding of the location of the service receiver, we need to first pin down on the question ‘Kaun Banega ‘Service Receiver’? It is also not out of place to note that the POP Rules have defined ‘Location of Service Receiver’ but have not defined ‘Service Receiver’. Let us take few case studies to understand, who is the service receiver? 

    Scenario 1: 

    The Facts: 

    A Inc’ located in the United States of America has two subsidiaries namely R&D Ltd’ and ‘Manufacturing Ltd’ located in India. ‘R&D Ltd’ is engaged in provision of research and development services and ‘Manufacturing Ltd’ is engaged in manufacturing activities. 

    A Inc receives an order from a company located in UK, for study of certain drug and manufacture and supply of the product resulted out of such study. Since, R&D Ltd is engaged in research activates, A Inc places an order on the former for such study and issuance of a report. R&D Ltd studies the case and prepares a report and sends the same to A Inc with an Invoice for $ 1,50,000. 

    Further, to this, A Inc places an order on Manufacturing Ltd for manufacture of such drug based on the report issued by R&D Ltd and supply the product to the customer located in UK. Manufacturing Ltd supplies the product to UK and raises an invoice on UK for such supply. 

    The Crux – Kaun Banega ’Service Receiver’: 

    From the given facts, we need to conclude whether ‘A Inc’ – who is paying for the services provided by R&D Ltd or the ‘manufacturing Ltd’ – who is actually using the services of R&D Ltd - is the service receiver? 

    The Tax Impact in light of POP Rules: 

    If ‘A Inc’ is called to be ‘service receiver’: 

    Then the services provided by R&D Ltd falls under the general rule that is Rule 3 and accordingly the place of consumption is the location of the service receiver that is USA and no service tax is required to be paid. 

    If ‘manufacturing Ltd’ is called to be ‘service receiver’: 

    Then Rule 8 comes into play, stating that if the service provider (R&D Ltd) and service receiver (manufacturing Ltd) are located in the taxable territory, the place of consumption of service is taxable territory, which is India and accordingly the transaction attracts service tax in the hands of R&D Ltd. 

    So, from the above, it is very clear that determining the service receiver plays a crucial role under the POP rules. 

    Scenario 2: 

    The facts: 

    Vel Limited located in India is engaged in procuring SIM cards and talk time from foreign telecom service providers. Mr Frequent, who is a resident of India, plans to visit Singapore for a holiday purpose. Now, Vel has approached Mr Frequent and sold him the SIM and talk time pertaining to Singapore telecom service provider. 

    The moment Mr Frequent lands in Singapore, he can utilize the telecom services provided by the Singapore telecom service provider. The flow of consideration is as under: 

    • Vel Limited pays the Singapore telecom service provider in CFE for procuring the SIM Cards and talk time. 
    • Mr Frequent pays Vel Limited for purchasing of Singapore SIM and talk time for accessing the services provided by Singapore Telecom. 

    The Crux – Kaun Banega ’Service Receiver’: 

    From the given facts, we need to conclude whether ‘Vel Limited’ – who is paying for the services provided by Singapore Telecom or the ‘Mr Frequent’ – who is actually using the services of Singapore Telecom - is the service receiver? 

    The Tax Impact in light of POP Rules: 

    If ‘Vel Limited’ is called to be ‘service receiver’: 

    Since the services provided by Singapore Telecom are falling under the general rule that is Rule 3 and accordingly the place of consumption is the location of the service receiver, that is India and hence service tax is required to be paid. Since the service provider is located in the non-taxable territory, the obligation to pay service tax is on the Vel Limited (commonly called as Import of Services) as per Entry No 10 of Notification No 30/2012-ST dated 20.06.2012. 

    If ‘Mr Frequent’ is called to be ‘service receiver’: 

    The general rule that is Rule 3 and accordingly the place of consumption is the location of the service receiver, that is India and hence service tax is required to be paid. However, the services received by an Individual other than for commerce, industry or any other business or profession are exempted vide Entry No 34 (a) of Notification No. 25/2012-ST dated 20.06.2012 (famously known as Mega Exemption Notification) and accordingly no service tax is required to be paid. 

    So, from the above, once again, it is very clear that determining the service receiver plays a crucial role under the POP rules. 

    Scenario 3: 

    The facts: 

    Mr XYZ, an employee of a multi-national company, approaches a courier company located in India to deliver a courier to his business associate, Mr ABC located in USA. However, as per the policies of the company, the recipient of the courier is required to pay the courier charges. Accordingly, Mr XYZ has advised the courier company to collect the courier charges from his business associate located outside taxable territory. 

    Now, the courier agency delivers the packet to the business associate and collects the courier charges and intimates the status of the delivery to Mr XYZ. 

    The Crux – Kaun Banega ’Service Receiver’: 

    From the given facts, we need to conclude whether ‘Mr ABC’ – who is paying for the services provided by courier agency or the ‘Mr XYZ’ – who is actually using the services of courier agency - is the service receiver? 

    The Tax Impact in light of POP Rules: 

    If ‘Mr XYZ’ is called to be ‘service receiver’: 

    Then Rule 8 comes into play, stating that if the service provider (courier agency) and service receiver (Mr XYZ) are located in the taxable territory, the place of consumption of service is taxable territory, which is India and accordingly the transaction attracts service tax in the hands of courier agency and the same shall be collected from the service receiver. 

    If ‘Mr ABC’ is called to be ‘service receiver’: 

    Then the services provided by courier agency falls under the general rule that is Rule 3 and accordingly the place of consumption is the location of the service receiver that is USA and no service tax is required to be paid. 

    So, the moot question that has to be answered is whether the person paying for the services or the person utilizing the services can be called as Service Receiver? 

    The Education Guide realized by CBEC vide Para 5.3.3 has tried to answer the question as to “who is the service receiver?” The response to such question is reproduced hereunder: 

    “Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his behalf. 

    Illustration 

    A lady leaves her car at a service station for the purpose of servicing. She asks her chauffer to collect the car from the service station later in the day, after the servicing is over. The chauffer makes the payment on behalf of the lady owner and collects the car. Here the lady is the 'person obliged to make the payment' towards servicing charges, and therefore, she is the receiver of the service” 

    Applying the logic from the TRU Circular – the person who is legally entitled to receive a service, whether or not who makes the payment is the service receiver. However, the Illustration provided by the TRU Circular stresses that the service receiver is ‘person obliged to make the payment’. 

    In certain circumstances, the person who is legally entitled to receive a service and person obliged to make payment might be different. In the Illustration, the person legally entitled to receive a service is the Lady and obliged to make payment is the Lady and hence there does not exists any problem in such a scenario to identify the service receiver. 

    However, like in Scenario 3 – the person legally entitle to receive the service is Mr XYZ (sender of the courier) and the person obliged to make payment is Mr ABC are different and hence it would be very hard for the trade to identify the service receiver and the Board has to come up with acute principles as to find out who is the service receiver. 

    Applying the rationale of the majority in the verdict of Honorable CESTAT of New Delhi in the case of Paul Merchants Ltd vs Commissioner of C.Ex., Chandigarh reported in 2013 (29) STR 257 (Tri-Del) – it has to be seen for whom the benefit of services provided accrues and not the performance of the service. If the benefit accrues to a person outside India then the service can be called as Export even the service is terminated in India. However, the minority view is otherwise. 

    Further, the judgment is rendered in light of Export of Service Rules, 2005 which does not find place in the statue book at this point of time and hence the rationale has to be carefully applied under the POP regime. 

    TECHNICAL SESSIONS:

     

    S No.

    Event

    Date

    Speaker

    Venue

     

     

     

     

     

     

     

    1

    Transition from Companies Act 1956

    08-Aug-2014

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    SBS - Hyd

     

    to 2013 – The Compliance Perspective.

     

    2

    Usage of Excel in CA Profession

    14-Aug-2014

    CA Saran Kumar

    SBS – Hyd

     

     

     

     

     

     

     

     

    3

    Overview of Tax Audit

    22-Aug-2014

    CA Sai Mallikarjuna Rao

    SBS – Hyd

     

     

    (Practicing Chartered Accountant)

    4

    Analysis of PF, ESI & Minimum Wages

    29-Aug-2014

    S V Ramachandra Rao

    SBS – Hyd

     

     

    (CMD Resource Inputs Ltd)

     

     

     

     

     

    5

    Updates in FEMA

    05-Sept-2014

    CA G Murali Krishna

    SBS – Hyd

     

     

     

     

     

     

     

     

     

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